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Unit 1 Introduction To International Business: Structure
Unit 1 Introduction To International Business: Structure
Unit 1
Unit 1
Structure:
1.1 Introduction
Objectives
1.2 Introduction to International Business
Definition
Evolution
1.3 Elements of International Business
Domestic vs. international business
Advantages of international business
Drivers of international business
Entry to international business
1.4 Globalisation
International vs. global business
Benefits of globalisation
1.5 Summary
1.6 Glossary
1.7 Terminal Questions
1.8 Answers
1.9 Case-let
1.1 Introduction
The world economy is globalising at an accelerating pace as countries
previously closed to foreign companies have opened up their markets.
Geographic distance is shrinking because of the Internet, as the ambitious
companies aim for global leadership. All this is possible because of booming
international business.
International business is mainly concerned with the issues that are related to
international companies and governments cross border transactions.
International business involves multiple countries to satisfy the objectives of
every individual as well as the organisations. International business
management is a process of achieving the global objectives of a firm by
effectively managing the human, financial, intellectual and physical
resources.
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In this unit, you will study about the dynamics of global business in todays
business environment and the need for multinational companies to tap
international markets for their business. In this unit, you will also examine
the difference between international business and global business.
Objectives:
After studying this unit, you should be able to:
describe the evolution of international business.
explain the concept of international business.
analyse the difference between domestic, international, and global
business.
explain the dynamics of globalisation.
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Buy
Ship
Order/Prepare
Importer
Exporter
Insurance
Company
Chamber of
Commerce
Export/Import
Agent
DGFT
Licensing
Authority
Embassies
ECGC/Credit
Checking
Suppliers/Sub
Contractors
Other
Intermediaries
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Transport
Freight
forwarder
Packers &
Consolidators
Transporter
Fumigation &
Pest Control
Carrier/MTO
Shipping line
Export
Inspection
Agency
Other
Intermediaries
Pay
Customs
Custom
Clearance
Custom House
Agent
ICDs/CFSs
Health
Authorities/
PHO
Terminal
Operators
Port
Management
Other
Intermediaries
Payment
Bank
Financial
institutions
Factor/forfeitors
Other
Intermediaries
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representatives from 44 nations across the world. It laid down the framework
for international business. The outcome of the Bretton Woods conference is
stated below:
Establishment of International Monetary Fund (IMF) and International
Bank for Reconstruction and Development (IBRD).
Regulated foreign exchange market system.
Currency convertibility.
Subsequent to the Bretton Woods conference, after several rounds of
negotiations and international agreements, several trade barriers and tariffs
were reduced or removed within the guidelines of General Agreement on
Trade and Tariffs (GATT).
Creation of the WTO on 1 January, 1995, marked the biggest reform of
international trade since World War II. Under the Marrakech agreement,
WTO was formed to replace GATT. The WTO is the only international body
that deals with the rules of trade between nations. Its main objective is to
facilitate smooth international trade.
Self Assessment Questions 1
1. _____________ can be defined as any business that crosses the
national borders of the country of its establishment.
2. Exports and imports do not constitute international business.
(True/False)
3. ____________ is considered as the first MNC in the world.
4. Bretton Woods conference led to the formation of _____________.
a) World Trade Organisation
b) International monetary fund
c) United Nations Organisation
d) General Agreement on Trade and Tariffs
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Diversify risk Any company can dilute its business risk by spreading
its operations to a number of different and diverse countries rather than
depending on any one market or region. For example, during the 1997
Asian financial crisis, companies with exposure in European and
American countries were able to sustain far better than their
counterparts in Asia.
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Export strategy This method remains the most common means of entry
into international markets. Export strategy is a very attractive option that is
merely an extension of domestic operations. It also minimises the risk
component as well as the capital requirement. The host companys
involvement in the international market is limited to identifying customers for
marketing its products.
Licensing A domestic company can license foreign firms to use the
companys technology or products and distribute the companys product. By
licensing, the domestic company need not bear any costs and risks of
entering foreign markets on its own, yet it is able to generate income from
royalties. The reverse of this arrangement is the risk of providing valuable
technological knowledge to foreign companies, and thereby losing some
degree of control over its use. Monitoring licenses and safeguarding
companys Intellectual Property Rights can prove to be challenging in an
international scenario. Puma adopted licensing strategy post 1999.
Franchising Licensing works well for manufacturing companies but
franchising is a better option for international expansion efforts of service or
retailing companies. Franchising has the same advantages as licensing.
The franchisee bears almost all the costs and risks in establishing the
foreign operations. The franchisers contribution is limited to providing the
concept, technology and training the franchisee in the already established
model. Maintaining quality poses the biggest challenge to the franchiser.
McDonalds uses franchising model.
Foreign Direct Investment (FDI) FDI is the investment made by a
company in a foreign country to start its operations. Various options
available for an FDI are as follows:
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Joint Ventures (JV) This is a very popular mode of entry into foreign
markets, as it minimises business risk and investment. It is owned by
one or more firms in proportion to their investment. If a JV is done with
an existing competitor, it could be termed as a strategic alliance. Sony
Ericsson is an example of joint venture between Sony, a Japanese
company and Ericsson, a Swedish company.
Merger or acquisition A company can merge into or acquire an existing
company with established operations in a foreign country. It saves a lot
of time in construction, initial setup, and regulatory approvals and so on.
In the bargain, the acquiring company can use all the established brand
names, distribution networks and so on of the acquired company.
Eg. Proctor and Gamble
Strategic investment Any firm can purchase a stake in a foreign
company, whereby they are entitled to a share in the profits, if any. The
shareholding can be a minority stake and may be without voting rights.
Generally, the investing company does not participate in the
management of the target company.
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1.4 Globalisation
In the previous section, we learnt the various aspects of international
business. We will now broaden our perspective and examine globalisation.
Globalisation is a process where businesses are dealt in markets around the
world, apart from the local and national markets. According to business
terminologies, globalisation is defined as the worldwide trend of businesses
expanding beyond their domestic boundaries. It is advantageous for the
economy of countries because it promotes prosperity in the countries that
embrace globalisation. In this section, we will understand globalisation, its
benefits and challenges.
1.4.1 International vs. global business
Most of us assume that international and global business are the same and
that any company that deals with another country for its business is an
international or global company. In fact, there is a considerable difference
between the two terms.
International companies Companies that deal with foreign countries for
their business are considered as international companies. They can be
exporters or importers who may not have any investments in any other
country, apart from their home country.
Global companies Companies, which invest in other countries for
business and also operate from other countries, are considered as global
companies. They have multiple manufacturing plants across the globe,
catering to multiple markets.
The transformation of a company from domestic to international is by
entering just one market or a few selected foreign markets as an exporter or
importer. Competing on a truly global scale comes later, after the company
has established operations in several countries across continents and is
racing against rivals for global market leadership. Thus, there is a
meaningful distinction between a company that operates in few selected
foreign countries and a company that operates and markets its products
across several countries and continents with manufacturing capabilities in
several of these countries.
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International
Global
Location
Business
Product-line
Mostly standardised
products sold worldwide,
moderate customisation
depending on the regulatory
framework
Production
Source of supply
of raw materials
Marketing and
distribution
Cross country
connections
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Company
organisation
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1.5 Summary
Now, let us summarise what we have discussed in this unit about
introduction to international business:
International business involves cross border movement of goods and
services. It includes exporting, importing, franchising, licensing etc.
International business dates back to the Babylonians who plied their
goods across distant lands.
International business differs from domestic business in some important
features like the financial management of the business, the legal and
regulatory framework, and the market forces that dictate the demand of
products. Some of the entry modes for international business include
exports, licensing, franchising and FDI.
International business and globalisation are two different things.
Globalisation involves companies that invest and operate in other
countries. It promotes economic growth and prosperity in the countries
that embrace globalisation. Some of the benefits of globalisation include
liberalisation of economies and the free flow of information.
1.6 Glossary
Acquisition: The process by which a company buys most, if not all, of the
target company's controlling shareholding in order to assume control of the
target firm.
Demographics: The composition of a countrys population in terms of age,
sex, marital status, family size, education, geographic location, and
occupation.
IPR: Intellectual Property Rights are the legal rights over an intangible
asset. For example, designs, ideas, music composition and so on.
Subsidiary: A company whose controlling interest is held by a bigger
(parent) company.
Trading bloc: An agreement between some countries or regions to promote
trade and eliminate trade barriers within the member states.
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1.8 Answers
Self Assessment Questions 1
1. International business
2. False
3. British East India Company
4. b) International monetary fund
Self Assessment Questions 2
5. True
6. b) Market forces
7. False
8. Drivers
Self Assessment Questions 3
9. Global companies
10. True
11. True
12. Globalisation
Terminal Questions
1. International business can be traced back to 200 BC. Discovery of new
sea routes in the sixteenth century propelled international business into
dimensions with the formation of multinational companies. Post World
War II, it took a new dimension and led to globalisation that has been
witnessed today. For more details, refer sub-section 1.1.1.
2. Distinguishing factors between domestic and international businesses
are legal and regulatory framework, financial systems, trade barriers and
tariffs, accounting and taxation, culture and markets. For more details,
refer sub-section 1.3.1.
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1.9 Case-let
BATA An International Company
Bata Shoe Company, founded in 1894 in the former Czechoslovakia
(presently headquartered in Lausanne, Switzerland), is one of the world's
leading footwear retailers and manufacturers, with operations across five
continents managed by three regional meaningful business units (MBUs).
The MBU approach provides quality resources and support in key areas
to the companies operating in similar markets such as product
development, sourcing, or marketing support. Each MBU is
entrepreneurial in nature, and can quickly adapt to changes in the market
place and seize potential growth opportunities.
Batas three MBUs are Bata Europe, Lausanne, Switzerland; Bata
Emerging Markets, Singapore; and Bata Branded Business, Best,
Holland.
Bata's strength lies in its worldwide presence. While local companies are
self-governing, each one benefits from its link to the international
organisation for back-office systems, product innovations, and sourcing.
Research and development Bata operates six Shoe Innovation
Centres (SICs). Research is conducted in applying new technologies,
materials, and designs for shoe comfort features. Each SIC has a product
focus to supply complete packages of services for the manufacturing
and marketing of innovative shoes.
Sikkim Manipal University
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Shoe making expertise Apart from being one of the world's leading
footwear retailers, Bata is also an expert in making shoes, with over 110
years of experience in manufacturing. Currently, they operate 33
production facilities across 22 countries.
While most modern day manufacturers outsource to Asia, Bata
manufactures predominantly in their own manufacturing facilities across
the world, guaranteeing quality and expertise.
Approximately half their factory outputs are destined for sale through
Bata-owned retail stores, and the balance is manufactured to the
specifications of wholesale customers or under contract to other footwear
brands.
Bata innovations in footwear production techniques are being used by
other competitors in the industry even today.
In 2010, Bata served 1 million customers a day; employed more than
50,000 people; operated more than 5,000 retail stores; and managed
retail presence in more than 70 countries.
Discussion Questions
1. Bata is a global company. Justify. (Hint: operates in 70 countries)
2. Identify the strategy that Bata uses for entry into new markets. (Hint:
Own showrooms)
3. What are the factors that help Bata retain its global leadership
position? (Hint: Innovation)
Source: www.bata.com, Retrieved on 28 June 2012
References:
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Thomson Jr., Arthur; Strickland III, A. J.; Gamble, John E. & Jain,
Arun K. (2006). Crafting and Executing Strategy: The Quest for
Competitive Advantage. Tata McGraw Hill Publications Co. Ltd.
E-References:
http://cas.bellarmine.edu/tietjen/Ecol&Evol/connections.htm, retrieved on
18th September, 2010
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